Nifty 50 (18,203) and Nifty Bank (43,969) witnessed varied performance last week as the former lost 0.6 per cent, whereas the latter gained 0.4 per cent. Consistent with this, the futures and options (F&O) data show that the participants are optimistic about Nifty Bank, but have maintained a cautious approach with respect to Nifty 50. Below is the analysis of derivatives data of the two indices.
The Nifty 50 May futures contract was down 0.6 per cent as it closed at 18,225 last week. At the same time, the cumulative Open Interest (OI) of Nifty 50 futures dropped to 127.7 lakh contracts on May 19 versus 129.3 lakh contracts on May 12. This is an indication of long positions being liquidated.
Coming to options, the Put Call Ratio (PCR) of contracts expiring on May 25 stood at 0.85 on Friday. This shows bearish bias because of more call selling when compared to puts. However, we could see significant addition of OIs in 18000- and 18100-strike put options, which means, these are good support levels.
So, even though there is some weakness, the index bears are expected to be cautious and might not go full throttle.
On the other hand, the option chain shows that 18400- and 18500-strike calls have a considerable number of OIs outstanding. Hence, these prices are potential resistance levels.
Considering the above factors, the chances for the index consolidating, at least until May 25, are high.
From a trading perspective, it is better to stay away until there emerge clear signs with respect to direction. Probably, the break of the 18,100-18,400 range can lend us some cues about the next leg of trend.
The rally on Friday helped May Nifty Bank futures (43,967) to end last week with a gain of 0.5 per cent. Interestingly, the cumulative OI increased to 31.3 lakh contracts on May 19 as against 27.8 lakh contracts on May 12. This indicates the arrival of fresh longs over the past week.
The options data too gives us a sense of bullishness as the PCR of options expiring on May 25 stands at 1.12. Which means, there have been comparatively higher number of put writing versus call selling. Since 43500- and 44000-strike put options have a good number of OIs outstanding, the index might surpass 44,000 easily.
On the other hand, notable resistance levels according to the options chain are at 44,500 and 46,000.
Since the inclination is bullish, traders can implement bullish strategies on Nifty Bank. One can consider bull call/put spread in options. But in futures, taking into account the risk-reward ratio, it is better to wait for Nifty Bank futures to dip to 43,500-43,600 range before going long. Alternatively, one can buy Nifty Bank futures, if it rallies past 44,500.